Analysis: Money laundering, tax dodging on the Isle of Man

The government of the Isle of Man (IoM) has spent the last several months in damage control mode, as revelations from the Panama and Paradise Papers continue to expose the Island’s role in the complex web of offshore finance.

The Island featured prominently in both the Panama and Paradise Papers, with a combined total of 6434 offshore entities, 3170 officers and 2368 addresses mentioned in the leaks.

The leaks also placed the Island at the heart of a high profile scandal involving alleged VAT dodging on the purchases of private jets to the tune of over $1 billion.

Finance factor

Politicians have spoken publicly about the need to change the Isle of Man’s image as a haven for questionable money, and are making legislative changes with the goal of improving the Island’s international reputation on financial crime.

The offshore finance industry has deep roots in the small nation, however, and digging them out may not be an easy task.

Like other British dependencies, a failing local economy in the 1960s and 70s drove the Island to reinvent itself as an appealing destination for international finance.

Today the financial sector makes up 37.8% of the Island’s GDP, and directly employs 21% of its population.

Many more people are indirectly reliant on the industry and the business it attracts to the Island, for example cleaning office buildings or tending to the yachts of the super-wealthy (or the private jets, for that matter).

There is a close relationship between the government and the finance sector, with many politicians – including both the current Chief Minister and the current Minister of the Department for Enterprise – coming from careers in the financial sector and some returning to the sector after leaving politics.

Corner of crime?

Whilst the majority of economic activity generated by the Island’s finance industry is legitimate, there have also been opportunities for illicit forms of business to thrive.

Tax evasion is not the only risk which washes in on the tide of international financial flows.

The Island’s financial and corporate services make an appealing target for those looking to launder money through the international system.

The government’s own National Risk Assessment, conducted in 2015, acknowledged that the combination of high net worth clients, complex corporate structures and insufficient customer due diligence processes contribute to placing the Isle of Man at risk for money laundering.

As a result of the UK’s membership in the Financial Action Task Force, in 2012 the Island became subject to FATF’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) monitoring process, driving substantial changes to the Island’s anti-money laundering and counter-terrorism financing (AML/CTF) regime in recent years.

There are consistent themes running through evaluations of the Isle of Man’s AML/CTF processes, beginning with a 2009 report from the International Monetary Fund and culminating in the Island’s first full MONEYVAL Mutual Evaluation in 2016.

Whilst the basic legal structure of the Isle of Man’s regime is considered to be sound and improving, in practice investigating agencies are under-staffed, under-resourced, under-trained and overwhelmed.

The MONEYVAL evaluation found that “the [Financial Crime Unit] lacks experienced staff and appropriate AML/CFT training and there are concerns about the effectiveness of the basic functions of the FCU.”

This has contributed to extremely low levels of detection, investigation and prosecution for financial crime.

In 2015, for example, the Financial Crime Unit received 1821 Suspicious Activity Reports but conducted only 20 investigations, and prosecuted just one individual.

The lack of investigators with adequate training in terrorism financing was also highlighted as a possible reason why no cases of terrorism financing have been detected.

Change ahead?

The MONEYVAL review appears to have been something of a trial by fire for the Isle of Man investigatory agencies. In his Annual Report 2016-17, Chief Constable Gary Roberts called it “by far the biggest challenge faced by the Constabulary during the year.”

“The assessment was rigorous, intrusive and time-consuming. Its conclusions were far-reaching, highlighting significant shortfalls in the Island’s approach across several key areas… So significant and complex are the operational challenges within the financial crime sphere that I could easily allocate all of the Constabulary’s detectives to ongoing financial crime investigations, yet still not have enough investigators to meet demand.”

Speaking more bluntly to the Isle of Man Public Accounts Committee in November 2017, the Chief Constable explained, “The MONEYVAL assessment said two things: it said, in terms of structure and processes, the regime here is pretty good. In terms of the effectiveness of the regime, we are not good at all. That, in part, was down to absence of numbers, absence of training, absence of expertise, but simply down to our inability to convert the law into arrests and convictions.”

The Financial Crime Unit in 2016-2017 consisted of 12 people, with responsibility for over 27,000 companies, 93 foundations and 22 banks registered in the Isle of Man.

Moreover, those dozen officers are frequently pulled off onto other tasks. The Chief Constable highlighted the difficulties which his limited number of officers face when asked to police everything from petty vandalism to complex financial crime.

“In the Isle of Man, policing is about balance, so you cannot specialise in neighbourhood policing because that would be to the detriment of financial crime or to the detriment of investigating fatal road traffic collisions or to the detriment of investigating child abuse. But you have to do all of those things, so what you have all the time is an organisation that is constantly trying to balance: it does a bit of that and a bit of this and a bit of the other.”

Systemic problems in the collection and management of basic information and statistical data about financial crime have also dogged the Island.

As just one example, by as late as 2015 investigators did not have an online system for suspicious activity reporting – something which the government’s own risk assessment acknowledged “had a considerable impact on the ability of the FCU to carry out investigations.”

Without accompanying boosts to the capacity, resources and training of investigatory and enforcement agencies, however, there is a real risk that these changes may go little further than the paper they are written on.

KYC360 contacted the Isle of Man government to ask it to respond to points raised in the above analysis, and it responded with a number of points, saying in summary:

The Mutual Evaluation Report (MER) [states] that the IoM has a very high level of compliance with the FATF’s 40 Recommendations.

As a result of required improvements, the IoM was placed in MONEYVAL’s Enhanced Follow-Up Procedure and as a jurisdiction the Island is showing the highest-level of commitment in addressing the issues and recommendations highlighted in the MER.

The report also highlight areas for improvement including the resourcing of financial intelligence gathering and investigations.

Regarding the IoM’s FIU, the unit has published its Annual Report 2016/17 and Strategic Delivery Plans for its first two years of operation, 2016/17 and 2017/18, which provide information on the work and achievements of the FIU.

As can be seen from those documents, significant investment in human and technical resources and training has taken place.

Our politicians have never said the IoM is a haven for questionable money. The government recognises that the IoM, is at risk of being used for illicit finance, which is true of most jurisdictions.

Countries with international business need to take measures to protect the country and individuals at home and abroad from the threat of financial crime.

Furthermore, in January 2017, the High Court of Tynwald (“Tynwald”), which is the parliament of the IoM, approved the IoM’s Programme for Government 2016-2021.

Prior to its submission to Tynwald, the document was developed, agreed and signed collectively by all the members of the Council of Ministers, and sets out the strategic objectives, themes, outcomes and initial actions to shape the work of the IoM Government over a five year period.

Within the Programme for Government it is stated that the IoM will: “Consider and respond to issues identified in the international MONEYVAL report on the Isle of Man, prioritising and taking action as required” and also “maintain our robust, zero tolerance stances in relation to money laundering and the financing of terrorism.”

About the author of the article: Melbourne-based Elise Thomas has a background in international affairs and a strong interest in financial crime, data and technology issues.

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